CEO ownership, external governance, and risk-taking

E. Han Kim and Yao Lu

Journal of Financial Economics, 2011, vol. 102, issue 2, 272-292

Abstract: This paper shows the relation between CEO ownership and firm valuation hinges critically on the strength of external governance (EG). The relation is hump-shaped when EG is weak, but is insignificant when EG is strong. The results imply that CEO ownership and EG are substitutes for mitigating agency problems when ownership is low. However, very high levels of share ownership can reduce firm value by entrenching the CEO and discouraging him from taking risk, unless mitigated by strong EG. We identify channels through which CEO ownership affects firm value by examining R&D, which is discretionary and risky. We find CEO ownership similarly exhibits a hump-shaped relation with R&D when EG is weak, but no relation when EG is strong. Our results are robust to endogeneity issues concerning CEO ownership and EG.

Keywords: Managerial share ownership; R&D; Product market competition; Institutional ownership concentration (search for similar items in EconPapers)
JEL-codes: D86 G32 G34 L22 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (126)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:102:y:2011:i:2:p:272-292

DOI: 10.1016/j.jfineco.2011.07.002

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